Why GameStop Shares Sank

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of GameStop were heading lower today, falling as much as 11% on news that Microsoft's next Xbox won't be compatible with used games.

So what: GameStop sells both new and used video games and equipment and in its most recent quarter made 48% of gross profit and 28% of sales from used games. The new Xbox will have a system, like Microsoft Office products, that requires an activation code, giving it no value beyond the initial user. Naturally, this should hurt GameStop's ability to sell the used Xbox games; however, Piper Jaffray's Michael Olson reiterated his "overweight" rating the stock, saying that Microsoft's move is a mistake since it dissuades users from buying the new game systems and lowers their value.

Now what: GameStop would appear to have more problems than Microsoft's latest initiative. The retailer's model seems like the equivalent of Blockbuster but with video games, and as new games shift away from tangible cartridges to digital, downloadable units, the company is likely to feel the pain. Net income has been sliding in recent quarters, and as we've seen from other fading retailers, the company recently introduced a juicy dividend to assuage investors as well as share buybacks, which seems to be a sign that it has no useful investments to make. One way or another, it looks like it will be game over for GameStop in the next few years.